- The stock market rose as the week ended after a positive start to the Q3 earnings season.
- Bets for a 25-bps November Fed rate cut increased to 91%.
- The upcoming US retail sales report will show the economy’s health.
Equities ended higher on Monday as technology stocks rallied despite thin holiday trading. Risk sentiment improved on Friday after major banks reported positive earnings. Meanwhile, market participants are preparing for the crucial US retail sales report later this week.
S&P 500 earnings estimates (Source: Bloomberg Intelligence)
Despite poor estimates, the stock market rose as the week ended with a positive start to the Q3 earnings season. Major banks were the first to report ahead of more reports this week. According to estimates, annual Q3 earnings might hit 4.9%. Investors will watch reports from major companies like Netflix and Goldman Sachs this week.
Furthermore, markets had to deal with the constantly shifting outlook for Fed rate cuts. Data last week revealed that consumer inflation increased by a higher-than-expected 0.3% in September. Moreover, it rose by 2.4% on an annual basis. The unexpected jump in price pressures lowered the likelihood of a 25-bps Fed rate cut to about 80%.
At the same time, it introduced the chance of a pause in November. A gradual pace for the Fed hurts stocks in the short term because borrowing costs drop slower. The upbeat inflation data followed a blockbuster jobs report. The economy is steady, and inflation is easing slower than expected, making for a soft landing.
However, on Friday, the US wholesale inflation report raised rate cut bets. Notably, producer prices remained unchanged in September, while economists had expected a 0.1% increase. Prices at the producer level eventually reflect consumer prices. Therefore, if inflation drops at the wholesale level, it will also fall at the consumer level. Consequently, bets for a 25-bps November Fed rate cut increased to 91%, boosting equities.
The positive sentiment extended to Monday, leading to record closes for the S&P 500 and the Dow Jones Industrial. Market participants will also watch for more clues on the Fed’s policy outlook this week. Notably, policymakers who spoke on Monday, including Neel Kashkari and Christopher Waller, struck a cautious tone.
Furthermore, the upcoming retail sales report will show the economy’s health. Economists expect sales to increase by 0.3% after a 0.1% increase in the previous month. Recent data has come in better than expected. If sales beat forecasts, rate-cut bets will keep dropping.
